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The Importance of ROI Planning
How do you calculate ROI?
When growing a business in any sector, especially in a market as skittish as the one we´re in at the moment, every penny counts. All spending should be done carefully to ensure that a maximum return on investment (ROI) is achieved, and to realise this goal an effective ROI plan of action needs to be established and vigilantly adhered to.
But what investments will require such micro-planning, and how can we possibly know if an investment is going to mature to show us the rewards that we hope it will?
Which investments should show a decent ROI?
Simply put, everything that a company spends money on (over a sum determined to be suitable for your organisation) should be considered an investment – the research and development of new products, marketing, search engine optimisation and additional human resources, to name but a few of the most common when growing a business. They all have a cost, and they all have the potential to benefit an organisation financially, the two elements needed in an ROI calculation.
Growing a business from scratch, especially with minimal funding assistance, can certainly heighten your awareness of such things as the return expected from every penny spent. However, when companies blossom and mature this attention to detail often slips from the priority list. Effective ROI planning is essential to refocus your business on this essential growth strategy, for without it each investment is just a lucky dip of possibilities.
The ROI calculation
The fundamental elements of an ROI calculation are what you spend and how you expect to benefit from the investment. The calculation looks like this:
ROI = [(Benefit - Investment)/Investment)]*100
But this is where things get a little ambiguous, because although the investment may be quantifiable, the benefits are often made up of the quantifiable, the intangible and the unknown. When growing a business this kind of uncertainty can be quite unnerving.
For instance, if you will be growing a business through an investment in an advertising campaign, you can use a figure in the calculation to represent the amount of interest it should generate. But what about the knock-on effect on your corporate image, the longer-term retention of your company´s name in the memories of your audience, and the additional motivation translated into productivity that your workforce gains from seeing their faces on a TV ad?
Other factors to consider
As mentioned above, the benefits and potential risks involved in an investment stretch far beyond the financial. Growing a business through any investment can result in increased productivity; improved morale; a sharper image of the company; a happier, healthier, more dedicated workforce; increased employee retention – and so on.
The benefits, and in fact the risks, of an investment can sometimes be unpredictable, as Leicester City Council found out in the example below.
When investments turn bad
When it was reported this week that Leicester City Council was trialling the use of Apple´s iPad with four of its counsellors with a view to rolling out the expensive tablet computers to fifty-four councillors and senior officers, let´s just say the news was not met with much support. Yes, iPads may be less intrusive for home visits and meetings, and they probably are more portable and accessible than the current technologies being used by the councillors, but all that means nothing when faced with the public outcry over the costs involved. Not surprising when you consider that this is a council that has recently announced around 1,000 job losses, and spending cuts of £100m – so the £40,000 investment in these top-of-the-line technologies has stirred up some strong emotions.
When growing a business, sometimes it´s less about the direct advantage gained as the result of an investment and more about how it might affect your organisation´s image.
Making the most of ROI planning?
Now the exact nature of your ROI plan will depend on your business, but it should contain most of the following basic stages:
Stop, breathe, compose yourself – When an investment opportunity aimed at growing a business comes up that you are led to believe could benefit your business, it´s tempting for even the most experienced decision maker to be swept along on a wave of positivity. So stop, breathe and compose yourself while you take in the facts, not the rhetoric.
Take a good long look – Review every element of the investment opportunity to determine the likelihood of a good return with minimal risk: how long is the payback period, what is the predicted return, can your business afford the investment and the possibility of it not working out as expected?
If it looks too good to be true, it probably is – This may seem obvious, but question everything: why does this person want to work for us, why is this advertising company offering us such a good rate, why do the returns they´re telling me about sound a little unreasonable? Today´s cynic is tomorrow´s wealthy man or woman.
Do the calculation – Once all the facts have been gathered, generate the most accurate calculation for ROI that you can and decide whether growing a business through such an investment is right for your organisation.
Think about it some more – There is rarely a reason to rush an investment decision. A measured, considered approach is always the best way forward.
While it´s not possible to be 100 per cent certain of the outcome of any investment, the only logical way forward when growing a business is to have a plan of action for assessing and rating all opportunities so as not to waste your budget. Develop a plan that works for your business and ensure that all decision makers adopt it as a matter of course. By plugging the leaks in your budget you give your business a greater chance of success.